Get the Most Out of Your Low Down Payment
When it comes to real estate, buying a home can be an extremely tricky process. Despite how exciting investing in a home might seem, the entire process can put a damper on your positive expectations. When it comes to investing in a home, many people do not financially have the option of putting a large down payment on their home. For many of us, it’s simply not a financially realistic goal. At one time, years ago, a twenty percent down payment on your home was expected. Over the years, however, this practice slowly faded out, eventually dropping down to a required ten to fifteen percent. To this day, it’s possible to put a down payment as low as five percent on your home. However, despite the appeal of this, there are pros and cons when it comes to deciding on a low down payment or larger one.
Most people in the home-buying market end up paying anywhere from a five percent to a twenty percent down payment on their home. For many people, especially those buying their first home, a low down payment is necessary in order to purchase the house you want. Fortunately, many lenders–Fannie Mae, for example–offer a very small, low down payment mortgage to qualified buyers. Low down payment and low-interest home loans are readily available to those people looking for a real estate option that won’t bankrupt them.
Benefits of a Low Down Payment
There are many benefits to a low down payment, the bigger one of course giving the buyer the option to buy a house that’s affordable versus to rent one. In situations where money is tight, a low down payment may very well be all you can afford. Income tax savings is also big, as this will reduce the after-tax ownership cost for the home ownership cost. Another large benefit of making a low down payment is what’s called leverage. This means that the homeowner controls a huge investment with a small amount of cash. When this happens, the resulting return in invested dollars can be much better than homeowners can earn anywhere else. However, if you are only able to make a low down payment on your home, you may be stuck with a much higher mortgage–one you may not be comfortable paying for the next thirty or so years. Despite the money being a smaller amount up front, your monthly mortgage payments will be so much more than expected. If this is something you understand and are prepared for, a low down payment could very well be the best possible option for you and your family.
Downfalls of a Low Down Payment
As with almost everything in life, the bad always comes with the good. When it comes to a large down payment instead of a low down payment, many people are under the impression that a hefty down payment does nothing but protect the lender. While this is true in some aspects, there’s more to it than that. A large down payment doesn’t simply protect your lender, but it protects you, the buyer, as well. A low down payment is not always all it’s hyped up to be, and if you’re not in the market for coping with the result of a low down payment, it may not be the way to go. Like it was mentioned earlier, a low down payment will most likely end up bringing your monthly mortgage payment up. As appealing as it may be to pay a smaller down payment on your home, you must understand and be prepared for whatever your monthly mortgage will come out to be. After all, a down payment, whether large or small, doesn’t make any difference if you lose your home because you couldn’t make the payments. Also, if you are trying to decide if a large down payment or a low down payment is better, try to keep in mind that many mortgage lenders, through a list of certain banks, may (and can!) end up charging you private mortgage insurance after your offer of a lower down payment.
Of course, an expected down payment on your home will likely change depending on what state you are buying in. In Las Vegas, for example, a down payment on your home can range anywhere from a three point five percent down payment to something as high as a forty percent of the property value. This is bound to change in each state, but not by a drastic amount. Most places are looking at a 3.5% down payment on your first home, but that can sometimes be more and sometimes be less. Most of it depends on the lender and program you qualify with. Obviously, the better your credit score is, the more options you will have available to you.
The bottom line is, whatever your down payment cost decision ends up being, make sure you are comfortable with the choice. Whether large or small, you’ll be paying for that home for a long time, so don’t make any financial mistakes.